Sallie Mae Student Loan Horror Stories Bring a Slap on the Wrist

While many seem stuck in ever-increasing student loan debt, lender Sallie Mae has been making record profits.

BOSTON (TheStreet) -- One in 10 borrowers defaulted on their federal student loans in the first two years after graduation, with one in seven defaulting in the first three years, the Department of Education reported last week. These defaults often lead to debt-collection methods including late fees and penalties and the garnishing of wages, federal tax refunds and even Social Security and disability payments.

But even while many seem to get the shaft by being stuck in a cycle of ever-increasing student loan debt, lender Sallie Mae has been making record profits -- even as it has been found violating laws and its own contractual obligations to the federal government, according to a report released in January by the National Consumer Law Center.

Sallie Mae made a $2 million settlement to New York to resolve claims about improper marketing of student loans, violating a contract on recovery and disclosure in 2008 via its debt-collection arm Pioneer Recovery and neglecting to report complaints by student loan borrowers as determined by the Department of Education's inspector general, the report says.

The lender is also under investigation by the Department of Justice and Consumer Financial Protection Bureau, and an Education Inspector General Audit Report found it improperly got $22.3 million in excess student loan subsidies from the government between 2003-06.

Similar examples of Sallie Mae's bad behavior were noted in a September letter to the secretaries of the Department of Education and the Department of Treasury by U.S. Sen. Elizabeth Warren, a Massachusetts Democrat. Warren discussed how Sallie Mae violated the Servicemembers Civil Relief Act and the Equal Credit Opportunity Act by charging military personnel excessive interest on their student loans.

Despite this laundry list of transgressions, Sallie Mae reaped $321 million in profits in 2010 and had a net income of $1.4 billion last year. It continues to borrow from the federal government as well as banks and other businesses at extremely low rates of interest often less than 1%. Meanwhile, many of its borrowers have paid as high as 12.8% in interest (although a 2011 policy change caps its interest rates at around 9.8%).

"While the government has helped Sallie Mae maintain its profitability, it is not nearly as generous when it comes to student borrowers," Warren said in her letter, while calling the government sanctions imposed on Sallie Mae for rule-breaking a "slap on the wrist."

Sallie Mae started out as a federal program 1972 but has been a private company since 1993 -- although its loans are still federally insured and it services more than $550 billion in federal loans.

"Given their role in creating the crash, it is reasonable to expect lenders to do everything possible to help borrowers with unaffordable loans. Distressingly, this has not occurred," says the Law Center report, referring to the Great Recession that began in 2008. It offers several stories from Sallie Mae borrowers, with a recurring theme being harassment, the tacking on of egregious fees and an unwillingness to work out an affordable payment plan.